G5 reported revenue of SEK359m which was just above our estimate of SEK357m. Gross profit was in line with expectations with a margin of 68% driven by a growing share of own games which stood at 73% in the quarter (up from 66% in Q3 2021 and 69% in Q2 2022). EBITDA came in at SEK89m which was 5% above our forecast of SEK85m with UA costs coming in slightly below our estimate (22% of revenue vs our estimate of 23% of revenue). However, the reported EBIT came in lower at SEK-23m compared to our estimate of SEK48m as the company made write-downs of SEK72.5m due to a change in how it will account for the development of games going forward. Excluding the write-downs, EBIT was slightly above our estimate.

While the underlying results were in line with our expectations the major news in G5’s Q3-report was the change of its development funnel and accounting of capitalised development costs. Historically, the company has capitalized development costs on all games while with the new methodology it will only capitalise the development of games that have been launched globally. Going forward, the new methodology will mean that less development costs will be capitalized which impact profitability negatively in the short term while the long-term profitability outlook is unchanged.

To give an indication of how the new methodology will impact G5’s profitability the company gave a one-time guidance of its EBIT-margin for Q4 2022E which expects to be in the range of 13-15%. The company also gave some details on how the changed methodology impacted in Q3 2022 where capitalisation was lowered cSEK6.5m relating to the development of new games. On the back of this, we have made new assumptions on capitalised development costs going forward which results in an increase of opex (excluding depreciation and amortisation) of 18% for 2023E and 13% for 2024E.

Overall, this lowers our EBITDA-margin estimates from previous 27-28% to 25-26% for 2023-24E. The impact on EBIT is more significant as amortisation levels will remain unchanged in the near term and our EBIT-margin estimates are lowered from 18-19% to 14-16% for 2023-24E. The impact on investments is on the other hand positive as development costs for new games are no longer capitalised. The charts below illustrate our updated assumptions.

Although we have lowered our margin assumptions due to the new accounting methodology the underlying outlook remains unchanged in our view. G5 continues to increase its share of own games in the portfolio which together with lower platform costs results in an increasing gross margin creating more operating leverage in the business model. As such, we still expect the profitability to improve over the coming years although from a new lower base level. Important to highlight is also that the accounting change does not impact cash flow and we expect G5 to remain highly cash-generating yielding potential for continued share buy backs and dividends.

The table below summarises our updated key financials where we have lowered our EBITDA with c11% for 2023-24E while EBIT is down 21% and 17% for 2023-24E. This comes mainly on the back of the new accounting of development costs although we have also slightly trimmed our growth assumptions and UA costs which have had a limited impact on the results.

DCF-valuation

Although our updated estimates have a limited impact on our DCF-valuation we have increased our assumptions for the risk-free rate which has lowered our base case to SEK450 (SEK510) while the new bull case stands at SEK700 (SEK760) and bear case at SEK270 (SEK290).

Estimate and EV/EBIT valuation trend

Looking at the valuation, G5 continues to trade at the very low end of its historical average EV/EBIT valuation range. The EPS estimate trend is also negative but we expect this to bottom out and turn positive after adjustments for the new accounting of development costs have been made.